Hurdle Rate of Return

The hurdle rate is the minimum return a company or investor is willing to take in order for them to start investing in the company.

Normally investors will have a rate of return that is the minimum they are willing to shoot for. Then when they find a stock they are going to invest in they create an expected rate of return for the stock. If that rate of return is at or higher than their minimum return it is a good buy.

Things to consider

1. Fluctuations of the Market

The one thing I should say is that if you are investing then this rate should take into consideration that the market will be up and down at times. You are going to want to understand that and your expected rate should be an expected average return after many years

2. Inflation

Another thing to consider is inflation. Most people leave out inflation when they consider investing their money. That is why you see people investing money into bank accounts that pay them 2% interest when inflation is 3-4%. This tends to be a losing proposition because not only is your buying power going down as time goes by, but you will also have to pay taxes on your money afterwards. This brings us to our next concern.

3. Taxes

Always remember that you will have to pay taxes on any money that you invest. The amount of money you make after taxes and inflation should be positive. If you are making a 5% return on your money and you are paying 20% of your money in taxes you will end up only making 4% on your money (because the other 1% goes to taxes).

With inflation at 3-4% this is just about breaking even. If you want to grow your buying power then you will need to make above 5% a year in this situation.